Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Investors may want to think twice before adding Australian vitamin maker Blackmores to their shopping carts this Christmas. Those that already own it might consider lightening their load.

This year, the company's stock has jumped sixfold, making it the benchmark S&P/ASX 200 Index's best performer, according to Bloomberg data.

Betting on China
The Australian natural health company's growth is tied to its relevance in Asia.
Source: Bloomberg

At a forward price-to-earnings multiple of 36.3 times, it's more expensive than larger Irish rival Glanbia (20.2 times) and Bill Ackman's least-favorite stock, Herbalife (11.4 times).

It's also more expensive than local competitor Swisse Wellness, which in September was sold for $1.2 billion, a multiple of around eight times its earnings before interest, taxes, depreciation and amortization. By comparison, Blackmores is trading at about 25 times its forward Ebitda. 

Blackmores' outsize gains have been fueled by appetite from Chinese consumers for its health supplements that range from fish-oil tablets to pregnancy and breast-feeding supplements, the latter which have been touted by China's most successful tennis player (and Blackmores ambassador) Li Na.

But the method of how Chinese consumers obtain such products should give investors reason to pause. There's a process that, according to the company's annual report, involves "increases in Chinese tourists and entrepreneurs shopping in Australia and Chinese-Australian consumers purchasing for relatives and friends and shipping to China." Once on the mainland, the products are resold via Chinese online marketplaces like Alibaba, a practice referred to by analysts as the grey market.

Even though China has drafted legislation that may require the inspection and labeling of imported goods, which could discourage such activity, Morningstar analyst Chris Kallos expects sales from this segment to accelerate. He reckons the grey market could represent 45 percent of Blackmores' revenues  by next year and almost 50 percent by 2017. 

Rather than simply acknowledging sales to Chinese consumers are, as the company puts it, "both directly and through Australian pharmacy partners" on the rise, Blackmores should be taking steps to clamp down on indirect sales. By not being able to guarantee the quality of its branded products sold in the region, the company faces counterfeit risk or tampering with existing goods that could result in recalls, and a severely tainted reputation.

Where to From Here?
The vitamin and supplement maker's investors should question how sustainable its recent growth is.
Source: Bloomberg

One way to regain control would be to reduce prices in China that would offset import tariffs . Currently, revenue from China isn't significant enough for the company to report on its own, in part because consumers can buy products from online marketplaces more cheaply. Instead, Chinese sales are lumped into 'Other Asia,' a category that includes Singapore, Hong Kong, Taiwan, Korea, Kazakhstan and Cambodia. Those nations represented just 7 percent of Blackmores' revenues in the year to June 30.

Investors have also been buoyed by the company's joint venture with Australian dairy company Bega Cheese. The pair plan to make a range of foods including infant formula, a $19 billion market in China that's already well served by U.S. and European heavyweights Mead Johnson Nutrition, Danone and Nestle as well as New Zealand's Fonterra. They're also betting the company's tie-up with Indonesia's Kalbe Farma will boost its reach in Southeast Asia longer term. 

But until that time -- or at the very least until it's clearer Blackmores' 36 percent revenue growth is sustainable -- investors may want to dodge what could be a bitter pill.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Revenues from Australia accounted for two-thirds of the company's overall sales in the year to June 30, 2015.

  2. These tariffs may be reduced after the China-Australia Free Trade Agreement is ratified. 

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Gillian Tan in New York at

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Katrina Nicholas at